How the US tariffs can harm the Dutch economy

Following turbulence on financial market, the announced tariffs were, at the time of publication of this article, paused for 90 days and capped at a rate of 10% for each country - except for China, where the US has imposed even higher duties. In response, China retaliated with similar tariffs on US goods. Additionally, certain products exported to the US, such as steel and automobiles, are still subject to higher import tariffs of 25% regardless of country of origin.

During the 90-day pause, the US government intends to negotiate and reach agreements with other countries regarding the level of the tariffs. How this global trade conflict will unfold remains highly uncertain. Eventually, the reciprocal tariffs as announced on 2 April may still come into effect. If this happens, tariffs will reach levels not seen since the Great Depression (Figure 1).

Figure 1 - US average import tariff rate

Although the actual import tariffs and their economic effects remain highly uncertain, we have simulated the effects of the 2 April (President Trump’s ‘liberation day’) tariffs on the Dutch economy, using various macroeconomic models. We focus mainly on the impact on GDP growth and inflation.

Previous studies by DNB (Autumn Projections 2024), the Netherlands Bureau for Economic Policy Analysis (CPB) (November 2024), and more recently by Rabobank, ABN AMRO and ING, have simulated the impact of import tariffs. Although the studies differ in the assumptions used, the expected impact on GDP growth is generally negative, with somewhat more varied but limited outcomes for inflation. This is reaffirmed in this study. A new CPB study on the effects of import tariffs on the Dutch economy will follow on 1 May, with similar results.

In 2024, about 6.5% of the value of Dutch export goods was destined for the US. While this may seem like a small share, the Dutch economy is still expected to be hit hard by US tariffs. Not only directly, through reduced exports to the US, but especially also indirectly through reduced trade with other countries, which are themselves affected by reduced exports to the US. As a result, world trade volumes will be considerably lower in 2025 and 2026, which will slow down Dutch export growth.

Due to declining global demand, increased uncertainty and risk premia, business investments will also decrease. As a consequence, unemployment will rise, which, in combination with lower incomes and lower stock prices, will mute spending by Dutch households. For two of our models, Figure 2 shows the possible effects of this scenario on Dutch GDP (see Box). The “bandwidth” in 2026 is relatively large, indicating that there is significant uncertainty in these simulations. On average, the scenario results in a decline of about one percentage point in real GDP growth for 2026 which we previously projected at 1.5% in December 2024.

Figure 2 - Impact on GDP for the Netherlands (percentage points)

The macroeconomic effects of price and demand shocks as described above are expected to take place in the short run. Eventually, a new equilibrium will evolve from the trade conflict, as relative price changes shift trade flows among individual countries and production sectors.

In order to analyse the longer run effects of the higher import tariff, we simulate the scenario in our multisector CGE model. The decline of GDP growth is found to be somewhat smaller, which reflects the adjustment in global trade and output patterns. Still, there is heterogeneity in the impact on output across production sectors (see Figure 4). For the Netherlands, the sectors that are mainly affected are the chemical, basic metals, and plastics industries. The chemical industry is particularly exposed to the US in terms of exported goods. The machinery sector exports relatively more to the US, but the negative impact of the tariffs in the scenario is smaller. The pharmaceutical sector, which has the highest share of exports to the US (14%), may even expect a small positive impact from the tariff scenario (0.1%), which is not surprising since pharma is exempted in the 2 April tariffs, although Trump has indicated an intention to revisit these products.

Figure 4 - Impact of tariff scenario on Dutch production sectors

The results of this scenario are subject to a high degree of uncertainty. Normally, higher US import tariffs would lead to higher inflation, prompting a rise in the monetary policy rate and a reduction in the US trade deficit. These developments typically strengthen the US dollar. However, in recent weeks, the dollar has weakened due to uncertainty among investors, prompting them to shift their portfolios, which has pushed US bond yields higher and simultaneously put downward pressure on the dollar. These financial market dynamics are typically absent in macroeconomic models.

Economic models generally do a good job of illustrating the channels through which import tariffs affect the economy. Global trade is the main channel. Higher tariffs increase the cost of imports, affecting global supply chains and trade relations. This slows the growth of world trade and, in turn, economic growth. Expectations of weaker growth - particularly in the US - undermine the confidence of producers, consumers, and investors. As a result, stock prices decline, and risk premiums on loans rise.

Rising import costs also drive up prices for both intermediate and consumer goods, fuelling inflation - especially in countries that impose the higher tariffs, particularly the US. In our scenarios, the US central bank – the Federal Reserve – is assumed to react to the inflationary pressure by raising the policy rate. Higher interest rate expectations lead to rising bond yields and typically support an appreciation of the dollar. As a result of the dynamics in financial markets, however, we saw a different movement in early April.

Via the economic channels described above, the US will end up pricing itself out of the world market. The higher the cost of imports for domestic production, the higher the cost of American products. This causes a sharp drop in US exports. Ultimately, according to the model scenarios, the GDP growth in the US will be on average about 1.5 percentage point lower in 2025 and 2026 than the 1.9% as projected in December 2024.

Our scenarios highlight how important international trade is for the Dutch economy. Due to the scale of the tariffs and unpredictability of US trade policy, and the rise in global uncertainty they cause, the world economy may become even more divided into separate trading blocs.

It is in the Netherlands’ interest to keep global trade barriers as low as possible. A tit-for-tat tariff war may seem like an obvious political response, but in the long run, it will only hurt economic growth for all countries involved. Trade barriers also tend to make companies less productive and competitive.

Boosting competition and productivity within the European Union is therefore essential for the Dutch economy. In the face of a looming global trade war, strengthening the European single market is more important than ever. Breaking down the last barriers to trade in the European Union will create a true single market, with sufficient scale and outlets, to benefit businesses, consumers and economic growth.